New FICO credit score launched

Posted in 'Credit Score' by Barry Stamp

26 March 2009

FICO, a US company previously known as Fair Isaac, has announced that it will launch in April a credit score specifically designed to measure the risk in mortgage lending. This follows criticism that its scorecards failed to prevent the current problems in the US mortgage industry, where FICO scores are used in three out of every four mortgage application assessments.

FICO is by far the largest supplier of credit scorecards. It claims to supply two-thirds of the top 100 banks in the world and 90 of the 100 largest financial institutions in the U.S., and every single one of the 100 largest U.S. credit card issuers.

The new mortgage score is based on the commonly used FICO score, amended to reflect use in a single type of credit. FICO calls these ‘Industry Option’ scores, and unlike the general FICO score, which US citizens generally know about and are disclosed to consumers readily, FICO Industry Option scores are closely guarded and are not made public.

In the UK, mortgage companies tend to underwrite mortgage applications based on lending policy rules, (such as 'not more than 4 times income', etc), and on manual assessment which includes examination of the credit reports of all applicants. The first mortgage scorecard brought into use in the UK was in 1986 at Lincoln National, which was developed following the analysis of many thousands of endowment mortgages. Since that time, other mortgage companies have used similar scorecards in-house, with some large lenders, like the Halifax, having in-house credit scoring expertise.

The major difference between the components used in a mortgage scorecard relate to two main aspects. First, the ‘loan to value’ ratio (the proportion of the value of a home that is mortgaged) is an important and very predictive element. For 100% mortgages it may be found that as many as 1 in 3 default, whereas for mortgages of 50% of value or less, less than 1 in 40 may default in normal economic conditions. Second, the number of mortgages held is also a very predictive component of a mortgage scorecard. The more mortgages held by an individual, the higher the risk of default.

In the US, many consumers know and monitor their FICO score, which is seen as very important as the very same FICO score is also used by so many US lenders. In the UK, checkmyfile is one of very few sources of credit scores which are based on credit scorecards used by UK lenders. That enables us to use the score to find out which lenders are most likely to say yes to your credit applications, thereby increasing your chance of a successful credit application.

You can check your own credit score for free using our Free Credit Score facility, or, for a more accurate indication, which takes input in the calculation from your credit report, this can be added to one of our online credit reports for only £2.99. Remember though, credit scores are included free if you subscribe to any of our value-for-money Unlimited Access services.